<PAGE>

===============================================================================

                                   UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.  20549


                                      FORM 10-Q


  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended September 30, 1998

                                          OR

  [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ______________to______________

                         Commission File Number   0-20191   
                                                  -------   

                                  *  *  *  *  *  *

                                  ODS NETWORKS, INC.
                                  ------------------ 
                (Exact name of Registrant as specified in its charter)


            Delaware                                   75-1911917    
-------------------------------                   ------------------- 
(State or other jurisdiction of                    (I.R.S. Employer
incorporation or organization)                    Identification No.)


                   1101 East Arapaho Road, Richardson, Texas 75081
                   ----------------------------------------------- 
                       (Address of principal executive offices)
                                      (Zip Code)

                                    (972) 234-6400                   
                 ---------------------------------------------------- 
                 (Registrant's telephone number, including area code)

                                    Not Applicable                
                     ------------------------------------------- 
                     (Former name, if changed since last report)

                                   *  *  *  *  *  *

Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days: 
Yes  X    No     
    ---      --- 

                                   *  *  *  *  *  *

The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, on October 31, 1998 was 18,507,233.

===============================================================================

<PAGE>

                         ODS NETWORKS, INC AND SUBSIDIARIES.

                                        INDEX

                           PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ---- 
<S>                                                                      <C>
Item 1.  Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 1998  
     and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . .     3

Condensed Consolidated Statements of Operations for the three
     months ended September 30, 1998 and September 30, 1997. . . . . .     4

Condensed Consolidated Statements of Operations for the nine
     months ended September 30, 1998 and September 30, 1997. . . . . .     5

Condensed Consolidated Statements of Cash Flows for the nine       
     months ended September 30, 1998 and September 30, 1997. . . . . .     6

Notes to Condensed Consolidated Financial Statements . . . . . . . . .     7

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . . . . .    10


                         PART II - OTHER INFORMATION

Item 2.  Changes in Securities . . . . . . . . . . . . . . . . . . . .    20

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . .. . .   20

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
</TABLE>


                                     -2-
<PAGE>


                           PART I - FINANCIAL INFORMATION
                                          
Item 1.  FINANCIAL STATEMENTS.

                         ODS NETWORKS, INC. AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                       (In thousands, except par value amounts)

<TABLE>
<CAPTION>
                                                Sept. 30,    Dec. 31,
                                                  1998         1997 
                                               -----------  ---------- 
                                               (Unaudited)
                                  ASSETS
<S>                                            <C>          <C>
Current Assets:
   Cash and cash equivalents                     $14,432      $17,911
   Short-term investments                          8,143       14,667
   Accounts receivable, net                        8,847        8,668
   Income taxes receivable                         1,412        3,159
   Inventories, net                               16,882       14,671
   Deferred tax assets                             2,860        1,721  
   Other assets                                      960        1,221
                                                 -------      ------- 
Total current assets                              53,536       62,018

Property and equipment, net                       11,546       11,836
Long-term investments                              1,605        3,168
Intangibles, net                                   8,042           -
Equity investments                                 1,729           -
Other assets                                         157          156
                                                 -------      ------- 
TOTAL ASSETS                                     $76,615      $77,178
                                                 -------      ------- 
                                                 -------      ------- 


                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                              $ 5,289      $ 5,381
   Accrued expenses                                4,033        3,328
   Deferred revenue                                2,257        1,462
                                                 -------      ------- 
Total current liabilities                         11,579       10,171

Deferred tax liabilities                           1,549          628
Capital lease obligations                              5           -

Stockholders' Equity:
   Preferred stock, $.01 par value,
      Authorized shares - 5,000
      No shares issued and outstanding
   Common stock, $.01 par value, 
      Authorized shares - 80,000
      Issued and outstanding shares - 18,507
      in 1998 and 16,486 in 1997                     185          165
   Additional paid-in capital                     29,504       19,488
   Retained earnings                              35,324       47,032
   Note receivable from shareholder               (1,260)          -
   Foreign currency translation adjustments         (271)        (306)
                                                 -------      ------- 
Total stockholders' equity                        63,482       66,379
                                                 -------      ------- 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $76,615      $77,178
                                                 -------      ------- 
                                                 -------      ------- 
</TABLE>

                               See accompanying notes. 

                                       -3-
<PAGE>


                         ODS NETWORKS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                       (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       Three Months Ended    
                                                   ------------------------  
                                                   Sept. 30,      Sept. 30,  
                                                     1998           1997     
                                                   ---------      ---------  
<S>                                                <C>            <C>
Net sales                                          $18,397         $26,231    
Cost of sales                                       10,670          15,702
                                                   -------         -------    
     Gross profit                                    7,727          10,529

Operating expenses: 
     Sales and marketing                             7,514           7,845
     Research and development                        3,256           2,638
     In-process research and development             1,047             -
     General and administrative                      1,421           1,187
                                                   -------         -------    
Operating loss                                      (5,511)         (1,141)

Interest income, net                                   322             446 
                                                   -------         -------    
Loss before income taxes                            (5,189)           (695)

Income tax benefit                                  (1,728)           (264)
                                                   -------         -------    
Loss before equity in affiliate                     (3,461)           (431)  

Equity in net loss of affiliate                        (64)            -  
                                                   -------         -------    
Net loss                                           $(3,525)        $  (431)
                                                   -------         -------    
                                                   -------         -------    
Basic and Diluted loss per share                   $ (0.21)        $  (.03)
                                                   -------         -------    
                                                   -------         -------    
Basic and Diluted weighted average
 common shares outstanding                          16,983          16,475
                                                   -------         -------    
                                                   -------         -------    
</TABLE>

                               See accompanying notes. 

                                        -4-
<PAGE>

                        ODS NETWORKS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                       (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       Nine Months Ended    
                                                   -----------------------  
                                                   Sept. 30,     Sept. 30,
                                                      1998          1997   
                                                   ---------     --------- 
<S>                                                <C>           <C>
Net sales                                          $ 61,825       $74,260  
Cost of sales                                        35,257        42,943
                                                   --------       -------  
     Gross profit                                    26,568        31,317

Operating expenses: 
     Sales and marketing                             23,450        22,863
     Research and development                         8,855         8,291
     In-process research and development              6,347           -
     General and administrative                       4,075         3,707
                                                   --------       -------  
Operating loss                                      (16,159)       (3,544)

Interest income, net                                  1,117         1,157 
                                                   --------       -------  
Loss before income taxes                            (15,042)       (2,387)

Income tax benefit                                   (3,470)         (907)
                                                   --------       -------  
Loss before equity in affiliate                     (11,572)       (1,480)  

Equity in net loss of affiliate                        (136)          -  
                                                   --------       -------  
Net loss                                           $(11,708)      $(1,480)
                                                   --------       -------  
                                                   --------       -------  
Basic and Diluted loss per share                   $  (0.70)      $ (0.09)
                                                   --------       -------  
                                                   --------       -------  
Basic and Diluted weighted average
 common shares outstanding                           16,746        16,420  
                                                   --------       -------  
                                                   --------       -------  
</TABLE>

                               See accompanying notes.

                                        -5-
<PAGE>

                         ODS NETWORKS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (In thousands)
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                        Nine Months Ended     
                                                    -------------------------  
                                                     Sept. 30,       Sept. 30, 
                                                        1998           1997    
                                                    ----------       --------  
<S>                                                 <C>              <C>
Operating Activities:
Net loss                                            ($ 11,708)      ($ 1,480)  
Adjustments to reconcile net loss to
 net cash provided (used) by operating activities:
   In-process research and development                  6,347             -
   Depreciation                                         2,598          2,364 
   Amortization                                           484             -
   Equity in net loss of affiliate                        136             -
   Deferred income taxes                               (1,558)        (2,107)
   Provision for doubtful accounts and returns            -               96
   Changes in operating assets and liabilities:
      Accounts receivable                                 680          1,359
      Inventories                                      (1,865)        10,048 
      Other assets                                        174           (369)
      Accounts payable and accrued expenses              (406)         1,405
      Deferred revenue                                    241           (512)
      Income taxes                                      1,747            968     
                                                    ---------       --------   
 Net cash provided by (used in) 
    operating activities                               (3,130)        11,772       
                                                    ---------       --------   
Investing Activities:
  Payments for corporate acquisition 
     (net of cash acquired)                           (5,604)            -
  Equity Investment in Blue Ridge Networks            (1,250)            -
  Purchases of short-term investments                 (2,437)        (17,967) 
  Maturities of short-term investments                12,124          15,911
  Purchases of long-term investments                  (1,606)         (4,656)
  Maturities of long-term investments                      6              16
  Purchases of property and equipment                 (1,830)         (2,782)
                                                    ---------       --------   
Net cash used in investing activities                   (597)         (9,478)
                                                    ---------       --------   
Financing Activities:
  Issuance of common stock and warrants                1,500             -
  Note receivable secured by company's 
      common stock                                    (1,260)            -
  Repayment of Essential Communication Corp.
      line of credit                                    (400)            -     
  Exercise of warrants and employee stock options        373             556
                                                    ---------       --------   
Net cash provided by financing activities                213             556   
                                                    ---------       --------   
Effect of foreign currency translation 
 adjustment on cash and cash equivalents                  35             (59)
                                                    ---------       --------   
Net increase (decrease) in cash and cash
 equivalents                                          (3,479)          2,791  
Cash and cash equivalents at beginning of
 period                                               17,911           6,565        
                                                    ---------       --------   
Cash and cash equivalents at end of period           $14,432        $  9,356
                                                    ---------       --------   
Supplemental disclosure of income taxes paid        $    -          $    310
                                                    ---------       --------   
                                                    ---------       --------   
Supplemental schedule of non cash activities:
   Tax benefit of stock options exercised
     and sold                                       $    -          $     27
                                                    ---------       --------   
                                                    ---------       --------   
</TABLE>

                               See accompanying notes. 

                                          -6-
<PAGE>

                        ODS NETWORKS, INC. AND SUBSIDIARIES
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note A - Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  The December 31, 1997 balance sheet was derived from
audited financial statements, but does not include all the disclosures required
by generally accepted accounting principles.  However, the Company believes that
the disclosures are adequate to make the information presented not misleading. 
In the opinion of management, all the adjustments (consisting of normal
recurring adjustments) considered necessary for fair presentation have been
included. The results of operations for the nine month period ended
September 30, 1998 are not necessarily indicative of the results which may be
achieved for the full fiscal year or for any future period.  The condensed
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.

Computation of Net Loss Per Share

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
on December 31, 1997 and has restated all earnings per share (EPS) data
presented.  Under SFAS No. 128 the Company is required to report two separate
earnings per share numbers, basic EPS and diluted EPS.  Diluted EPS is
essentially the same number the Company has previously reported as primary
earnings per share and includes the dilutive impact of employee stock options
and warrants.

Equity Investment

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, Inc.,
a privately-held company which provides secure remote access products for local
and wide area virtual private networks.  This investment was accounted for using
the equity method of accounting.  The Company's share of earnings or losses of
Blue Ridge Networks, Inc. is reported in the income statement of the Company.

Business Combination

On May 7, 1998, the Company acquired Essential Communication Corporation
("Essential"), a privately-held company based in Albuquerque, New Mexico. 
Essential designs and manufactures high-speed computer network equipment. The
Company exchanged a combination of $5.8 million of cash and approximately
305,000 shares of the Company's common stock for all outstanding shares of
Essential capital stock, and the Company issued 104,000 stock options in
exchange for all unexpired and unexercised options to acquire Essential capital
stock. In connection with the acquisition, the Company recognized a one-time
charge of $5.3 million, or $0.32 per share, for in-process technology in the
second quarter of 1998.  Essential's operations have been included in the
Company's condensed consolidated financial statements since May 7, 1998, and the
acquisition was accounted for using the purchase method of accounting.  The
total purchase price of $9.0 million was allocated to the net assets acquired
based on their estimated fair market value, which included approximately $4.1
million of intangible assets to be amortized over five years on a straight-line
basis; and approximately $5.3 million of in-process research and development. 
The in-process research and development was expensed at the date of the
acquisition.  Pro forma financial information has not been presented. The
acquisition of Essential does not meet the reporting requirements for a
significant subsidiary. 


                                          -7-
<PAGE>

Acquistion of Assets

On September 25, 1998 the Company completed an acquisition of certain assets
from Science Applications International Corporation ("SAIC"), a privately-held
company in San Diego, California. The Company acquired certain assets of the
Computer Misuse and Detection System ("CMDS") Division of SAIC and certain other
information security products under development.  In exchange for the CMDS
assets, the information security products under development and $1.5 million
dollars in cash, ODS issued to SAIC 1.6 million shares of the Company's common
stock and warrants to purchase 1,500,000 shares of its common stock.  Two
separate warrants each grant SAIC the right to purchase 750,000 shares of ODS
common stock.  The first warrant has an exercise price of $8.00 per share and a
term of 18 months.  The second warrant has an exercise price of $10.50 per share
and a term of 24 months. ODS' acquisition has been accounted for as a purchase
of software, in-process research and development and certain other assets. The
transaction value of approximately $6.9 million less the $1.5 million cash
received was allocated to the net assets acquired based on their estimated fair
market value. Assets acquired included approximately $1.1 million of in-process
research and development, $0.1 million of other intangible assets and
approximately $4.2 million of purchased software to be amortized over five years
on a straight-line basis. During the third quarter of 1998 the Company
recognized a one-time charge of $0.7 million (net of taxes), or $0.04 per share,
for write-off of the acquired in-process research and development.  The
acquisition of certain assets of SAIC does not meet the reporting requirements
for pro forma financial information.

Exchange of Stock Options in First Quarter 1998

     On January 21, 1998, the Compensation Committee of the Board of Directors
approved a stock option exchange program (the Exchange Program), pursuant to
which certain employees and officers holding incentive stock options (i) awarded
under the Company's 1987 Incentive Stock Option Plan in 1997 and (ii) awarded
prior to December 31, 1997, under the Company's 1995 Stock Option Plan (the 1995
Plan), were given the opportunity to exchange such options (Existing Options)
for new options (New Options), based on the fair market value of the Company's
Common Stock at the close of business on January 30, 1998.  All directors of the
Company, including the President and Chief Executive Officer and the Senior Vice
President, were ineligible to participate in the Exchange Program.

     As a result of significant declines in the market value of the Company's
Common Stock since issuance of the Existing Options, the Existing Options were
exercisable at prices which substantially exceeded the market value of the
Common Stock.  In approving the Exchange Program and in keeping with the
Company's philosophy of utilizing equity incentives to motivate and retain
qualified employees, the Compensation Committee acknowledged that retention and
attraction of qualified employees are critical to the Company's success and its
ability to continue to meet its performance objectives.  Additionally,
recognizing that stock options constitute a significant component of the
Company's compensation structure, the Compensation Committee deemed it important
to regain the incentive intended to be provided by the New Options to purchase
shares of the Company's Common Stock and therefore serve as a significant factor
in the Company's ability to continue to attract and retain the services of
superior quality personnel.

     Pursuant to the Exchange Program, holders of the Existing Options were
offered the opportunity to exchange, on a share-for-share basis, such options
for New Options having an exercise price of $7.50 per share, the fair market
value of the Company's Common Stock on the exchange date of January 30, 1998. 
Each New Option was awarded under the 1995 Plan and vests and is exercisable
with respect to 20% of the shares covered thereby on each anniversary date
thereof.  Eligible 


                                          -8-
<PAGE>

employees holding Existing Options for an aggregate of 646,800 shares of 
Common Stock with an average per share exercise price of approximately $15.87 
elected to participate in the Exchange Program and were issued New Options 
covering the same aggregate number of underlying shares as they had held 
pursuant to their respective Existing Options.  Other than the new exercise 
price and the commencement of a new vesting schedule, the option agreements 
relating to the New Options are substantially identical to the option 
agreements of the Existing Options they replaced. 

Note B - Inventories (In thousands)

Inventories consist of:

<TABLE>
<CAPTION>
                                          Sept. 30,       Dec. 31,
                                             1998           1997    
                                          --------        -------- 
     <S>                                  <C>             <C>
     Raw materials                         $ 5,787        $ 4,077
     Work in process                           866          2,004
     Finished products                       7,689          6,593
     Demonstration systems                   2,540          1,997 
                                           -------        ------- 
                                           $16,882        $14,671
                                           -------        ------- 
                                           -------        ------- 
</TABLE>

Note C - Intangible Assets, Net (In thousands)

Intangible assets consist of:

<TABLE>
<CAPTION>
                                          Sept. 30,       Dec. 31,
                                             1998           1997    
                                          --------        -------- 
<S>                                       <C>             <C>
CMDS Purchased Software                    $ 4,186        $     - 
CMDS Intangible Asset                          135              -
Essential Goodwill                           1,127              -
Essential Intangible Asset                   2,594              -      
                                          --------        ------- 
                                           $ 8,042        $     -  
                                          --------        ------- 
                                          --------        ------- 
</TABLE>

Note D - Accrued Expenses (In thousands)

Included in accrued expenses are the following:

<TABLE>
<CAPTION>
                                          Sept. 30,       Dec. 31,
                                             1998           1997    
                                          --------        -------- 
      <S>                                 <C>             <C>
      Accrued sales commissions           $   862         $   563
      Accrued property taxes                  431             689
      Accrued vacation expense                851             724
      Accrued warranty expense                475             475
      Other (individually less than
       5% of current liabilities)           1,414             877
                                          -------         ------- 
                                          $ 4,033         $ 3,328
                                          -------         ------- 
                                          -------         ------- 
</TABLE>

Note E - Note Receivable from Shareholder

Note receivable from shareholder of $1.3 million at September 30, 1998
represents amounts loaned to an officer during the third quarter of 1998 secured
by the Company's common stock.  These amounts have been classified as 
contra-equity because in the event the officer fails to remit payment, the 
Company will receive shares of the Company's common stock.  Subsequent to 
September 30, 1998 and through October 31, 1998, payments of approximately 
$71,000 were received.


                                          -9-
<PAGE>

Note F - Earnings per Share (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                       Three Months Ended Sept. 30,   Nine Months Ended Sept. 30,
                                       ----------------------------   ---------------------------
                                            1998         1997             1998         1997   
                                          -------       -------         --------     --------
<S>                                    <C>              <C>           <C>            <C>
Numerator:
Net loss                                  $(3,525)      $  (431)        $(11,708)    $ (1,480) 
                                          -------       -------         --------     --------
Numerator for basic and diluted
   earnings per share                     $(3,525)      $  (431)        $(11,708)    $ (1,480)
Denominator:

Denominator for basic earnings
    per share - weighted average
    common shares outstanding              16,983        16,475           16,746       16,420 
Effect of dilutive securities:
    Stock options and warrants                  0             0                0            0
                                          -------       -------         --------     --------
Denominator for diluted earnings
    per share - adjusted weighted
    average common shares out-
    standing                               16,983        16,475           16,746       16,420 
                                          -------       -------         --------     --------
                                          -------       -------         --------     --------
Basic and Diluted loss per share         $ (0.21)      $  (.03)        $  (0.70)    $  (0.09)
                                          -------       -------         --------     --------
                                          -------       -------         --------     --------
</TABLE>


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS


THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF 
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES 
EXCHANGE ACT OF 1934, THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS 
STATEMENTS CONCERNING: GROWTH AND FUTURE OPERATING RESULTS; DEVELOPMENTS IN 
THE COMPANY'S MARKETS AND STRATEGIC FOCUS; NEW PRODUCTS AND PRODUCT 
ENHANCEMENTS; POTENTIAL ACQUISITIONS AND THE INTEGRATION OF ACQUIRED 
BUSINESSES, PRODUCTS AND TECHNOLOGIES; STRATEGIC RELATIONSHIPS; AND FUTURE 
ECONOMIC, BUSINESS AND REGULATORY CONDITIONS. SUCH FORWARD-LOOKING STATEMENTS 
ARE GENERALLY ACCOMPANIED BY WORDS SUCH AS "PLAN," "ESTIMATE," "EXPECT," 
"BELIEVE," "SHOULD," "WOULD," "COULD," "ANTICIPATE," "MAY" OR OTHER WORDS 
THAT CONVEY UNCERTAINTY OF FUTURE EVENTS OR OUTCOMES. THESE FORWARD-LOOKING 
STATEMENTS AND OTHER STATEMENTS MADE ELSEWHERE IN THIS REPORT ARE MADE IN 
RELIANCE ON THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE SECTION 
BELOW ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS" SETS 
FORTH AND INCORPORATES BY REFERENCE CERTAIN FACTORS THAT COULD CAUSE ACTUAL 
FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THESE STATEMENTS.

                                     -10-
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain financial 
data as a percentage of net sales:

<TABLE>
<CAPTION>
                                   Three Months Ended Sept. 30,    Nine Months Ended Sept. 30,
                                   ----------------------------    ---------------------------
                                        1998         1997               1998         1997   
                                       ------       ------             ------       -----
<S>                                <C>              <C>            <C>              <C>
Net sales                              100.0%       100.0%             100.0%       100.0% 
Cost of sales                           58.0         59.9               57.0         57.8 
                                       -----        -----              -----        -----
Gross profit                            42.0         40.1               43.0         42.2
Sales and marketing expenses            40.9         29.9               37.9         30.8
Research and development expenses       17.7         10.0               14.3         11.2
In-process research and development      5.7          -                 10.3           -
General and administrative expenses      7.7          4.5                6.6          5.0
                                       -----        -----              -----        -----
Operating loss                         (30.0)        (4.3)             (26.1)        (4.8)
Interest income, net                     1.8          1.7                1.8          1.6
                                       -----        -----              -----        -----
Loss before income taxes               (28.2)        (2.6)             (24.3)        (3.2)
Income tax benefit                      (9.4)        (1.0)              (5.6)        (1.2)
                                       -----        -----              -----        -----
Loss before equity in
    affiliate                          (18.8)        (1.6)             (18.7)        (2.0)
Equity in net loss of affiliate         (0.4)          -                (0.2)         -  
                                       -----        -----              -----        -----
Net loss                               (19.2)%       (1.6)%            (18.9)%       (2.0)%
                                       -----        -----              -----        -----
                                       -----        -----              -----        -----


Switching product sales                 55.3%        41.3%              49.8%        37.7%
Shared bandwidth hub sales              34.1         50.2               41.4         55.4
Other sales                             10.6          8.5                8.8          6.9
                                       -----        -----              -----        -----
Net sales                              100.0%       100.0%             100.0%       100.0%
                                       -----        -----              -----        -----
                                       -----        -----              -----        -----


Domestic sales                          86.0%        71.0%              80.2%        72.0
Export sales to:
  Europe                                 9.2          7.5               12.1          8.3
  Canada                                 2.7          3.7                3.2          3.6
  Asia                                   1.4         16.5                4.0         13.9
  Latin America                          0.7          1.3                 .5          2.2
                                       -----        -----              -----        -----
Net sales                              100.0%       100.0%             100.0%       100.0%
                                       -----        -----              -----        -----
                                       -----        -----              -----        -----
</TABLE>
 

     NET SALES.  Net sales for the quarter and nine months ended September 
30, 1998 decreased to $18.4 million and $61.8 million, respectively, compared 
to $26.2 million and $74.3 million, respectively, for the same periods of 
1997 as sales of the Company's new network switching and security products 
did not increase quickly enough to offset the decrease in sales of its prior 
generation shared bandwidth intelligent hubs.
                                                                    
     Export sales for the quarter and nine months ended September 30, 1998 
decreased to $2.6 million and $12.2 million, respectively, compared to $7.6 
million and $20.8 million, respectively, for the same periods of 1997 
primarily due to adverse economic developments in Malaysia and South Korea.
                                          
     Direct net sales to various agencies of the U.S. Government were 14.8% 
and 16.1%, respectively, of net sales during the quarter and nine months 
ended September 30, 1998, compared to 14.0% and 12.5%, respectively, of net 
sales for the same periods of 1997.  Sales to Electronic Data Systems 
Corporation ("EDS") 

                                     -11-
<PAGE>

were 8.2% and 7.4%, respectively, of net sales during the quarter and nine 
months ended September 30, 1998, compared to 17.1% and 15.4%, respectively, 
of net sales for the same periods of 1997. Sales to Sapura Holdings Sdn. Bhd. 
("Sapura") were 0.1% and 2.2%, respectively, of net sales during the quarter 
and nine months ended September 30, 1998, compared to 12.3% and 9.6%, 
respectively, of net sales for the same periods of 1997. 

     GROSS PROFIT.  Gross profit decreased to $7.7 million or 42.0% of net 
sales for the third quarter of 1998 compared to $10.5 million or 40.1% of net 
sales for the third quarter of 1997.  Gross profit decreased to $26.6 million 
or 43.0% of net sales for nine months ended September 30, 1998 compared to 
$31.3 million or 42.2% of net sales for the same period of 1997. Gross profit 
margins in future periods may be affected by several factors such as 
continued product transition, declining market demand for prior generation 
products, obsolescence or surplus of inventory, shifts in product mix, 
changes in channels of distribution, sales volume, fluctuation in 
manufacturing costs, pricing strategies of the Company and its competitors 
and fluctuations in sales of integrated third-party products. Gross profit 
margins are typically lower on sales of integrated third-party products.

     SALES AND MARKETING.  Sales and marketing expenses decreased to $7.5 
million or 40.9% of net sales for the third quarter of 1998 from $7.8 million 
or 29.9% of net sales for the third quarter of 1997.  Sales and marketing 
expenses increased to $23.5 million or 37.9% of net sales for nine months 
ended September 30, 1998 compared to $22.9 million or 30.8% of net sales for 
the same period of 1997.  Sales and marketing expenses may vary as a 
percentage of net sales in the future.

     RESEARCH AND DEVELOPMENT.  Research and development expenses, excluding 
the one-time charge for in-process research and development, increased to 
$3.3 million or 17.7% of net sales for the third quarter of 1998 from $2.6 
million or 10.0% of net sales for the third quarter of 1997. Research and 
development expenses, excluding the one-time charge for in-process research 
and development, increased to $8.9 million or 14.3% of net sales for nine 
months ended September 30, 1998 compared to $8.3 million or 11.2% of net 
sales for the same period of 1997. The third quarter ended September 30, 1998 
was impacted by the hiring of certain CMDS research and development personnel 
in September 1998, and the nine months ended September 30, 1998 was impacted 
by the acquisition of Essential's engineering personnel in May of 1998.  The 
Company expects to continue to invest in research and development activities 
in the future in order to broaden its family of network switching, management 
and security products.
     
     IN-PROCESS RESEARCH AND DEVELOPMENT.  During the third quarter of 1998, 
the Company incurred a one-time charge associated with the acquisition of 
certain assets of SAIC of $1.1 million to expense the purchased in-process 
research and development that had not reached technological feasibility.  For 
the nine months ended September 30, 1998, the Company incurred one-time 
charges associated with the acquisition of Essential and certain assets of 
SAIC of $6.4 million to expense the purchased in-process research and 
development that had not reached technological feasibility.

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses 
increased to $1.4 million or 7.7% of net sales for the third quarter of 1998 
from $1.2 million or 4.5% of net sales for the third quarter of 1997. General 
and administrative expenses increased to $4.1 million or 6.6% of net sales 
for nine months ended September 30, 1998 compared to $3.7 million or 5.0% of 
net sales for the same period of 1997.  The increase in general and 
administrative expenses for the third quarter of 1998 was primarily due to 
the amortization of intangibles related to the acquisition of Essential on 
May 7, 1998. General and administrative expenses may vary as a percentage of 
net sales in the future.

                                     -12-
<PAGE>

     INTEREST.  Net interest income were to $0.3 million and $1.2 million, 
respectively, for the quarter and nine months ended September 30, 1998 
compared to $0.4 million and $1.2 million, respectively, for the same periods 
of 1997. Net interest income may vary in the future based on the Company's 
cash flow and rate of return on investments. 

     INCOME TAXES.  The Company's effective income tax rate was 33.3% and 
23.0%, respectively, for the quarter and nine months ended September 30, 1998 
compared to the 38.0% for the same periods of 1997. The effective tax rate 
represented by the Company's income tax benefit for the nine months ended 
September 30, 1998 of 23.0% would have been approximately 35.6% disregarding 
the expenses associated with the Company's write-off of $5.3 million of 
in-process research and development costs which were not deductible for tax 
purposes. 

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of liquidity at September 30, 1998 were 
$14.4 million of cash and cash equivalents, $8.1 million of short-term 
investments, $1.6 million of highly liquid investments with a stated maturity 
beyond one year. As of September 30, 1998, working capital was $42.0 million 
compared to $51.8 million as of December 31, 1997.

     Cash used in operations for the first nine months of 1998 were $3.1 
million, primarily due to an increase in inventory and a net loss for the 
period partially offset by an increase in income taxes receivable.  Future 
fluctuations in accounts receivable and inventory balances will be dependent 
upon several factors, including but not limited to quarterly sales, ability 
to collect accounts receivable timely, the Company's strategy as to building 
inventory in advance of receiving orders from customers, and the accuracy of 
the Company's forecasts of product demand and component requirements.

     Cash used in investing activities in the first nine months of 1998 was 
$0.6 million, primarily due to an equity investment in Blue Ridge Networks, 
Inc. of $1.25 million, cash used in the acquisition of Essential 
Communciation Corporation of $5.6 million and purchases of property and 
equipment of $1.8 million, partially offset by net maturities of investments 
of $8.1 million. 

     Cash provided by financing activities in the first nine months of 1998 
was $0.2 million, due to the $1.5 million cash received from the issuance of 
Common Stock and warrants in connection with the SAIC transaction and $0.4 
million from the issuance of Common Stock relating to the exercise of certain 
employee stock options partially offset by the $1.2 million note receivable 
from shareholder and repayment of Essential's line of credit in the amount of 
$0.4 million. 

     During the first nine months of 1998, the Company funded its operations 
solely through cash flows from operations.

     The Company intends to explore the possible acquisitions of businesses, 
products and technologies that are complementary to those of the Company.  
The Company is continuing to identify and prioritize additional networking 
and security technologies which it may wish to develop, either internally or 
through the licensing or acquisition of products from third parties.  While 
the Company engages from time to time in discussions with respect to 
potential acquisitions, there can be no assurances that any such acquisitions 
will be made or that the Company will be able to successfully integrate any 
acquired business.  In order to finance such acquisitions, it may be 
necessary for the Company to raise additional funds through public or private 
financings.  Any equity or debt financings, if available at all, may be on 
terms which are not favorable to the Company and, in 

                                       -13-
<PAGE>

the case of equity financings, may result in dilution to the Company's 
stockholders.
     
YEAR 2000 COMPLIANCE 

     Many currently installed systems and software products are coded to 
accept only two digit entries in the date code field.  These date code fields 
will need to accept four digit entries to distinguish 21st century dates from 
20th century dates.  As a result computer systems and/or software used by 
many companies will need to be upgraded to comply with such "Year 2000" 
requirements.

     The Company believes that the purchasing patterns of customers and 
potential customers may be significantly affected by Year 2000 issues.  Many 
companies are expending significant resources to correct, patch or replace 
their current software systems to achieve Year 2000 compliance.  These 
expenditures may result in reduced funds available to purchase products such 
as those offered by the Company.  

     The Company has reviewed its products offered to customers, and has 
determined that the versions currently offered to customers are Year 2000 
compliant.  Nonetheless, there can be no assurance that the Company's 
products, particularly when such products incorporate third-party products, 
contain all necessary date code changes necessary to ensure Year 2000 
compliance.  Although the Company has not experienced any Year 2000-related 
product liability claims or lawsuits to date, production of products that are 
not Year 2000 compliant may entail the risk of such claims and lawsuits.  The 
Company's defense against any future lawsuits, regardless of their merit, 
could result in substantial expense to the Company as well as the diversion 
of management time and attention.  In addition, Year 2000 product liability 
claims, regardless of the merit or eventual outcome of such claims, could 
affect the Company's business reputation and its ability to retain existing 
customers or attract new customers which, in turn, could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.
     
     The Company's Year 2000 compliance program consists of the following 
phases: (i) identification and assessment of internal Year 2000 issues, (ii) 
correction of internal Year 2000 issues, and (iii) review of disclosures of 
major suppliers and vendor confirmations as to Year 2000 compliance.  An 
inventory and analysis of internal management systems, information systems 
and equipment has been completed and the Company has determined that it will 
be necessary to upgrade portions of its software so that its computer systems 
will be Year 2000 compliant.  These modifications and replacements are being 
and will continue to be made in conjunction with the Company's overall 
information systems initiatives, are 75% complete and are scheduled to be 
completed by March 31, 1999.  In addition, the Company has begun contacting 
third-party vendors to ensure that any of their products that are 
incorporated into the Company's products or currently in use by the Company 
can adequately deal with the change in century.  Areas being addressed 
include major third-party suppliers of components of the Company's products 
as well as full reviews of the Company's manufacturing equipment, telephone 
and voice mail systems, security systems and other office support systems.  
The Company has also initiated formal communications with significant 
suppliers and customers to determine the extent to which the Company is 
vulnerable to those third parties' failure to remediate their own Year 2000 
issues.  This review and confirmation process is approximately 75% complete 
and is scheduled to be completed by March 31, 1999. No information technology 
initiatives have been deferred by the Company as a result of its Year 2000 
project. 

     The Year 2000 project cost to the Company is estimated to be immaterial. 
Costs incurred and expected to be incurred consist primarily of the cost of 

                                      -14-
<PAGE>

Company personnel involved in updating applications and operating systems and 
the costs of software updates and patches (many of which are provided free of 
charge from the vendors).  Such immaterial expenses are being funded through 
operating cash flows.  The Company has utilized the Company's internal 
technical personnel, and intends to continue to use such personnel, to 
address Year 2000 issues, rather than contract with third-party consultants.

     Based on available information, the Company does not believe any 
material exposure to significant business interruption exists as a result of 
Year 2000 compliance issues, or that the cost of remedial actions will have a 
material adverse effect on its business, financial condition or results of 
operations. Accordingly, and as Year 2000 project is on schedule to be 
completed by March 31, 1998, the Company has not formulated a most reasonably 
likely worse case scenario or adopted any formal contingency plan in the 
event its Year 2000 project is not completed in a timely manner. 

     Significant uncertainty still exists as to the global implications of 
the Year 2000 issue.  Costs of defending and resolving Year 2000-related 
disputes, reductions in product development programs by customers or the 
failure of the Company to adequately resolve internal Year 2000 compliance 
issues could result in a material adverse effect on the Company's business, 
operating results and financial condition.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

Numerous factors may affect the Company's business and future results of 
operations. These factors include, but are not limited to, frequent product 
introductions and rapid technological changes; competition and market 
acceptance of the Company's products; acquisitions within the industries the 
Company competes; acquisitions by the Company and the ability to integrate 
such acquisitions; frequent product transitions; the availability of 
components used in the Company's manufacturing processes; alliances with 
third-parties; dependence on key customers; risks and uncertainties related 
to international operations and currency fluctuations; dependence on 
proprietary technology; Year 2000 compliance issues; industry trends and 
developments; and general economic conditions.  The discussion below 
addresses some of these factors. For a more thorough discussion of these and 
other factors that may affect the Company's business and future results, see 
the discussion under the caption "Item 1 - Business" of the Company's Report 
on Form 10-K for the fiscal year ended December 31, 1997.
 
TECHNOLOGICAL CHANGES.  The market for the Company's products is 
characterized by frequent product introductions, rapidly changing technology 
and continued evolution of new industry standards. The market for network 
intelligent hubs, switches, management and security products requires the 
Company's products to be compatible and interoperable with products and 
architectures offered by various vendors, including other networking 
products, workstation and personal computer architectures and computer and 
network operating systems.  The Company's success will depend to a 
substantial degree upon its ability to develop and introduce in a timely 
manner new products and enhancements to its existing products that meet 
changing customer requirements and evolving industry standards.  The 
development of technologically advanced products is a complex and uncertain 
process requiring high levels of innovation as well as the accurate 
anticipation of technological and market trends.  There can be no assurance 
that the Company will be able to identify, develop, manufacture, market and 
support new or enhanced products successfully in a timely manner.  Further, 
the Company or its competitors may introduce new products or product 
enhancements that shorten the life cycle of or obsolete the Company's 
existing product lines which could have a material adverse effect on the 
Company's business, operating results and financial condition.  

                                      -15-
<PAGE>

COMPETITION AND MARKET ACCEPTANCE.  The market for network intelligent hubs, 
switches, management and security products is intensely competitive and 
subject to frequent product introductions with improved price/performance 
characteristics.  Even if the Company does introduce advanced products which 
meet evolving customer requirements in a timely manner, there can be no 
assurance that the new Company products will gain market acceptance.  Many 
networking companies, including Cisco Systems, Inc. ("Cisco"), Cabletron 
Systems, Inc. ("Cabletron"), Nortel Networks ("Nortel"), FORE Systems, Xylan 
Corporation ("Xylan") and others, have substantially greater financial, 
technical, sales and marketing resources, better name recognition and a 
larger customer base than the Company.  Many of the Company's large 
competitors offer customers a broader product line which provides a more 
comprehensive networking solution than the Company currently offers.  The 
Company anticipates increased competition from large telecommunication 
equipment vendors which are expanding their capabilities in the data 
networking market.  For example, Lucent Technologies and Nortel have acquired 
several networking companies to enhance their capabilities in data 
networking.  Further the Company anticipates increased competition from 
private "start-up" companies that have developed or are developing advanced 
network switching and security products.  Increased competition in the 
networking industry could result in significant price competition, reduced 
profit margins or loss of market share, any of which could have a material 
adverse effect on the Company's business, operating results and financial 
condition. 

     The Company is pursuing a strategy to increase the percentage of its 
revenue generated through indirect sales channels including value added 
resellers, system integrators, original equipment manufacturers and network 
service providers.  There can be no assurance that the Company's products 
will gain market acceptance in these indirect sales channels.  Further, 
competition among networking and security companies to sell products through 
these indirect sales channels could result in significant price competition 
and reduced profit margins.  
     
     The Company is also pursuing a strategy to broaden and further 
differentiate its product line by introducing complementary network 
switching, management and security products and incorporating new 
technologies into its existing product line.  There can be no assurance that 
the Company will successfully introduce these products or that such products 
will gain market acceptance.  The Company anticipates competition from 
networking companies, network security companies and others in each of its 
product lines.  The Company anticipates that profit margins will vary among 
its product lines and that product mix fluctuations could have an adverse 
effect on the Company's overall profit margins. 
           

     ACQUISITIONS. Cisco, Cabletron, FORE Systems, Lucent Technologies, 
Nortel and other competitors have recently acquired several networking and 
security companies with complementary technologies, and the Company 
anticipates that such acquisitions will continue in the future. These 
acquisitions may permit such competitors to accelerate the development and 
commercialization of broader product lines and more comprehensive networking 
solutions than the Company currently offers.  In the past, the Company has 
relied upon a combination of internal product development and partnerships 
with other networking vendors to provide competitive networking solutions to 
customers.  Certain of the recent and future acquisitions by the Company's 
competitors may have the effect of limiting the Company's access to 
commercially significant technologies. Further, the business combinations and 
acquisitions in the networking and security industry are creating companies 
with larger market shares, customer bases, sales forces, product offerings 
and technology and marketing expertise. There can be no assurance that the 
Company will be able to compete successfully in such an environment.

                                      -16-
<PAGE>

     In March 1998, the Company invested $1.25 million in Blue Ridge 
Networks, Inc. a private corporation which provides secure remote access 
products for local and wide area virtual private networks.  On May 7, 1998, 
the Company acquired Essential Communication Corporation, a privately-held 
company based in Albuquerque, New Mexico.   Essential designs and 
manufactures high-speed computer network equipment. In September 1998, the 
Company completed an acquisition of certain assets from Science Applications 
International Corporation ("SAIC"), a privately-held company in San Diego, 
California. The Company acquired certain assets of the Computer Misuse and 
Detection System ("CMDS") Division of SAIC and certain other information 
security products under development.  The Company may, in the future, acquire 
or invest in additional companies, business units, product lines, or 
technologies to accelerate the development of products and sales channels 
complementary to the Company's existing products and sales channels.  
Acquisitions involve numerous risks, including difficulties in assimilation 
of operations,  technologies, and products of the acquired companies; risks 
of entering markets in which the Company has no or limited direct prior 
experience and where competitors in such markets have stronger market 
positions; the potential loss of key employees of the acquired company; and 
the diversion of management's attention from normal daily operation of the 
Company's business.  There can be no assurance that any potential acquisition 
or investment will be consummated or that such acquisition or investment will 
be realized.

PRODUCT TRANSITIONS.  Once current networking products have been in the 
market place for a period of time and begin to be replaced by higher 
performance products (whether of the Company's or a competitor's design), the 
Company expects the net sales of such networking products to decrease. In 
order to achieve revenue growth in the future, the Company will be required 
to design, develop and successfully commercialize higher performance products 
in a timely manner.  For example, the market for shared bandwidth intelligent 
hubs, sales of which represented the majority of the Company's net sales over 
the past several years,  decreased in the first nine months of 1998 compared 
to the same period of 1997 and may continue to decrease as switching products 
with enhanced price/performance characteristics gain market acceptance.  
There can be no assurance that the Company will be able to introduce new 
products and gain market acceptance quickly enough to avoid adverse revenue 
transition patterns during current or future product transitions.
                    

MANUFACTURING AND AVAILABILITY OF COMPONENTS.  The Company's manufacturing
operations consist primarily of final assembly, testing and quality control of
subassemblies and finished units.  Materials used by the Company in its
manufacturing processes include semiconductors such as microprocessors, memory
chips and application specific integrated circuits ("ASICs"), printed circuit
boards, power supplies and enclosures.  All of the materials used in the
Company's products are purchased under contracts and purchase orders with third
parties.  While the Company believes that many of the materials used in the
production of its products are generally readily available from a variety of
sources, certain components are available from one or a limited number of
suppliers.  For example, certain ASICs designed into the Company's
InfiniteSwitch products are supplied by FORE Systems (see "Factors That May
Affect Future Results of Operations - Competition and Market Acceptance").  The
lead times for delivery of components vary significantly and exceed twelve weeks
for certain components.  If the Company should fail to forecast its requirements
accurately for components, it may experience excess inventory or shortages of
certain components which could have an adverse effect on the Company's business
and operating results.  Further, any interruption in the supply of any of these
components, or the inability of the Company to procure these components from

                                     -17-
<PAGE>

alternative sources at acceptable prices within a reasonable time, could have 
additional adverse effect on the Company's business and operating results.

THIRD-PARTY PRODUCTS.  The Company believes that it is beneficial to work 
with third parties with complementary technologies to broaden the appeal of 
the Company's switches, intelligent hub and network security products.  These 
alliances allow ODS to provide integrated solutions to its customers, 
combining ODS developed technology with third-party products such as certain 
routers from Cisco, ATM switches from FORE Systems and Gigabit Ethernet 
switch technology from Lucent Technologies.  As the Company also competes 
with these technology partners in certain segments of the market, there can 
be no assurance that the Company will have access to all of the third-party 
products which may be desirable to offer fully integrated solutions to ODS 
customers.
                    
DEPENDENCE ON KEY CUSTOMERS.   A relatively small number of customers have 
accounted for a significant portion of the Company's revenue. U.S. Government 
agencies and strategic network integrators are expected to continue to 
account for a substantial portion of the Company's net revenue.  The Company 
continuously faces competition from Cisco, Cabletron, Nortel, FORE Systems, 
Xylan and others for U.S. Government networking projects and corporate 
networking installations.  Any reduction or delay in sales of the Company's 
products to these customers could have a material adverse effect on the 
Company's operating results.

INTERNATIONAL OPERATIONS.  Export sales accounted for approximately 14.0% of 
the Company's revenue in the third quarter of 1998.  The Company expects that 
export sales will represent a significant portion of its business in the 
future.  The Company's international operations may be affected by changes in 
demand resulting from fluctuations in currency exchange rates and local 
purchasing practices, including seasonal fluctuations in demand, as well as 
by risks such as increases in duty rates, difficulties in distribution and 
other constraints upon international trade.  For example, the fluctuations in 
currency exchange rates and adverse economic developments in Malaysia, South 
Korea and certain other countries adversely affected demand for the Company's 
products in those countries in the fourth quarter of 1997 and the nine months 
of 1998.  These conditions may continue to adversely affect demand for the 
Company's products in those countries throughout 1998.  Additionally, while 
the Company's current products are designed to meet relevant regulatory 
requirements of the foreign markets in which they are sold, any inability to 
obtain any required foreign regulatory approvals on a timely basis could have 
a material adverse effect on the Company's operating results. 

INTELLECTUAL PROPERTY.  The Company's success and its ability to compete is 
dependent, in part, upon its proprietary technology.  The Company does not 
hold any issued patents and currently relies on a combination of contractual 
rights, trade secrets and copyright laws to establish and protect its 
proprietary rights in its products.  There can be no assurance that the steps 
taken by the Company to protect its intellectual property will be adequate to 
prevent misappropriation of its technology or that the Company's competitors 
will not independently develop technologies that are substantially equivalent 
or superior to the Company's technology.

The Company is also subject to the risk of adverse claims and litigation 
alleging infringement of intellectual property rights of others.  The Company 
could incur substantial costs in defending itself and its customers against 
any such claim regardless of the merits of such claims.  In the event of a 
successful claim of infringement, the Company may be required to obtain one 
or more licenses from 

                                     -18-
<PAGE>

third parties.  There can be no assurance that the Company could obtain the 
necessary licenses on reasonable terms.
          
IMPACT OF YEAR 2000.  The Company's Year 2000 project is estimated to be 
completed not later than March 31, 1999, which is prior to any anticipated 
impact on its operating systems.  The Company believes that with 
modifications to existing software and conversions to new software, the Year 
2000 issue will not pose significant operational problems for its computer 
systems.  However, if such modifications and conversions are not made, or are 
not completed timely, the Year 2000 issue could have a material impact on the 
operations of the Company.
          
The costs of the project and the date on which the Company believes it will 
complete the Year 2000 modifications are based on management's best 
estimates, which were derived utilizing numerous assumptions of future 
events, including the continuous availability of certain resources and other 
factors.  However, there can be no guarantee that these estimates will be 
achieved and actual results could differ materially from those anticipated.  
Specific factors that might cause such material differences include, but are 
not limited to, the availability and cost of personnel trained in this area, 
the ability to locate and correct all relevant computer codes, and similar 
uncertainties.
 
The Company is concerned that many enterprises will be devoting a substantial 
portion of their information systems spending to resolving this upcoming year 
2000 problem.  This may result in spending being diverted from networking 
solutions over the next two years.  The year 2000 issue could lower demand 
for the Company's products.  This factor, while not quantified, could have a 
material adverse impact on the Company's financial results.

GENERAL.  Sales of networking products fluctuate, from time to time, based on 
numerous factors, including customers' capital spending levels and general 
economic conditions.  While certain industry analysts believe that there is a 
significant market for network intelligent hubs, switches, management and 
security products, there can be no assurance as to the rate or extent of the 
growth of such market or the potential adoption of alternative technologies. 
Future declines in networking product sales as a result of general economic 
conditions, adoption of alternative technologies or any other reason could 
have a material adverse effect on the Company's business, operating results 
and financial condition.

Due to the factors noted above and elsewhere in Management's Discussion and 
Analysis of Financial Condition and Results of Operations, the Company's 
future earnings and stock price may be subject to significant volatility, 
particularly on a quarterly basis.  Past financial performance should not be 
considered a reliable indicator of future performance and investors should 
not use historical trends to anticipate results or trends in future periods.  
Any shortfall in revenue and earnings from the levels anticipated by 
securities analysts could have an immediate and significant effect on the 
trading price of the Company's common stock in any given period.  Also, the 
Company participates in a highly dynamic industry which often results in 
volatility of the Company's common stock price. 



                                     -19-
<PAGE>

                         PART II - OTHER INFORMATION

Item 2.  CHANGES IN SECURITIES.

In the third quarter of 1998, the Company issued 1.6 million shares of its 
common stock to Science Applications International Corporation ("SAIC") in 
connection with the acquisition by the Company of certain assets of SAIC.  In 
addition, the Company issued to SAIC (i) a warrant to purchase up to 750,000 
shares of the Company's common stock at an exercise price of $8.00 per share, 
exercisable at any time on or before March 25, 2000, and (ii) a warrant to 
purchase up to 750,000 shares of the Company's common stock at an exercise 
price of $10.50 per share, exercisable at any time on or before September 25, 
2000. These issuances were deemed exempt from registration under Section 5 of 
the Securities Act of 1933 in reliance upon Section 4(2) thereof. In 
addition, SAIC represented its intention to acquire the securities for 
investment only and not with a view to, or for sale in connection with, any 
distribution thereof and appropriate restrictive transfer legends were 
affixed to the certificates issued in such transaction.
 

Item 6.   EXHIBITS AND REPORTS ON FORM 8-K.

          (A.)  EXHIBITS.  The following exhibits are included herein:

                (27)     Financial Data Schedule
               
          (B.) REPORTS ON FORM 8-K.     On October 13, 1998, the Company filed a
                                        Current Report on Form 8-K (Item 5) in
                                        order to report the acquisition of
                                        certain assets from Science Applications
                                        International Corporation during the
                                        quarter ended September 30, 1998.












                                     -20-
<PAGE>

                              S I G N A T U R E S




Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Company has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.




                                    ODS NETWORKS, INC.
                                        (Company)



Date: November 13, 1998         By: /s/ Timothy W. Kinnear   
                                   --------------------------
                                    Timothy W. Kinnear
                                  Chief Operating Officer and
                                    Chief Financial Officer
                                (Principal Financial Officer)



 Date: November 13, 1998        By: /s/ Kandis Tate Thompson   
                                   --------------------------
                                     Kandis Tate Thompson
                              Controller - Finance and Accounting
                                (Principal Accounting Officer)
 





                                     -21-
<PAGE>

                                EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                      
-------
<S>         <C>
     27     Financial Data Schedule
</TABLE>















                                     -22-